U.S. Workers Were Less Productive in the Spring

WASHINGTON (AP) — U.S. workers were less productive in the spring for the second quarter in a row, a trend that may not bode well for future hiring.

Productivity dropped 0.3 percent in the April-June quarter, following a decline of 0.6 percent in the first three months of the year, the Labor Department said Tuesday. It was the first back-to-back decline in productivity since the second half of 2008.

The drop in productivity helped push unit labor costs up 2.2 percent. That follows a 4.8 percent rise in labor costs in the first three months of this year, the biggest increase since the last three months of 2008.

Rising labor costs reduce corporate profits. Labor represents the largest expense for most companies. And when workers are less productive and cost more, companies are less likely to add jobs.

Productivity measures the amount of output per hour worked. Higher productivity is generally a good thing because it can raise standards of living by enabling companies to pay workers more without raising their prices and increasing inflation.

Still, productivity gains can be painful in the short run if they are a result of job cuts. That's what happened in the recession, when productivity rose sharply as companies laid off millions of workers and figured out how to do more with less. Employees worked harder and companies invested in labor-saving technology and machinery.

A slowdown in productivity growth is bad for the economy if it persists for a long period. It can be good in the short term when unemployment is high, if it means companies are reaching the limits on how much extra output they can get from their existing work forces.

If economic growth increases later this year, less productive companies may have to step up hiring. But the gains are unlikely to be large. Many economists forecast growth of roughly 2.5 percent in the final six months of the year. That's barely enough to keep up with population growth.

Economists say a drop in productivity when economic growth has declined is a troubling sign. That likely means companies hired too many workers earlier this year, based on the assumption that growth was picking up. The result: weaker output from a larger work force.

"If demand remains weak, there's a danger that businesses may try to boost productivity by cutting jobs," said Paul Dales, an economist at Capital Economics.

The productivity trends are a sharp reversal from last year, when worker efficiency grew and labor costs fell. Productivity rose 4.1 percent in 2010, the most since 2002. Labor costs, meanwhile, dropped 2 percent, the biggest decline on records dating back to 1948.

The productivity figures were revised for several previous years based on recent updates to the government's estimates of economic growth, which were released late last month. The economy was weaker in 2009 and a bit stronger last year than originally estimated. Growth estimates for the first six months of this year were also marked down.

Economic growth slowed to a 0.8 percent annual rate in the first six months of the year. That's the weakest pace since the recession ended two years ago.

Consumers have cut back on spending in the face of stagnant wages, high unemployment and high gas prices. Supply disruptions stemming from Japan's March 11 earthquake also reduced output, primarily in the auto sector.

Employers responded by cutting back on hiring. They added an average of only 72,000 jobs per month from May through July. That's far fewer than the average of 215,000 per month added in February through April.

Growing fears that the country could be on the verge of another recession, concerns about the European debt crisis and the first-ever downgrade of U.S. debt have caused the stock market to plummet by about 15 percent in the past 2 ½ weeks.

The Federal Reserve, which is meeting on Tuesday, watches productivity and unit labor costs carefully. Since increases in productivity allow companies to pay workers more without raising the prices of their products, productivity gains can help keep inflation at bay.

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